H. Service Contracts

Objective

To ensure that the operations of special services providers are sufficiently free of all forms of risk, both financial and non-financial, that the likelihood of such bodies failing to meet their obligations to societies is reduced to an absolute minimum. Towards this end, to ensure that special services providers are not exposed to undue risk with respect to service contracts.

General Background

Under application of Section 245 of the FI Code, an SSP must obtain prior written approval from AFIC before entering into a management contract. Management contracts are defined as arrangements where a third party performs the whole or a substantial part of the functions of the SSP. The key feature of a management contract is the abrogation of total or substantial management control to a person or entity external to the SSP.

Examples include situations where the day-to-day operation of the SSP is managed through entities controlled by directors or by independent third parties.

Service contracts are other arrangements entered by an SSP to obtain services or products but without the abrogation of management control. Each SSP is likely to enter a variety of such contractual arrangements for valid economic and efficiency reasons, especially where the SSP neither has, nor seeks, the expertise. While service contracts will cover a range of relationships with external parties, AFIC is concerned with those contracts that create additional risks, create conflicts of interest or require disclosure to members and shareholders.

A conflict of interest may arise where an SSP enters arrangements with a director or officer (or related entity) for the provision of services. AFIC does not intend to outlaw such arrangements but seeks to ensure arm's length dealings.

Financial and operating leases entered into in the ordinary course of business on an arm's length basis are not service contracts for the purposes of this section. However, such leases are subject to normal reporting requirements as part of the financial statements.

Prudential Standards

5.4.8.a Each SSP must demonstrate systems for selection, review and renewal of service arrangements that ensure arm's length dealings.

5.4.8.b An SSP must not enter service contracts that:-

· diminish control of the SSP by the board;

· diminish AFIC's ability to review and supervise the SSP; or

· are contrary to the Financial Institutions Legislation.

5.4.8.c To avoid the establishment of unreasonable contingent liabilities, contract periods should not exceed two years unless approved by AFIC.

5.4.8.d Details of all material service contracts must be fully and clearly disclosed to members and shareholders. AFIC may deem a contract to be material.